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How Reliable is Your Ethical Compass? Falling Victim to Your Own “Blind Spots?”

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Presentation on theme: "How Reliable is Your Ethical Compass? Falling Victim to Your Own “Blind Spots?”"— Presentation transcript:

1 How Reliable is Your Ethical Compass? Falling Victim to Your Own “Blind Spots?”

2 We are no longer immune from the spotlight The IIA’s Code of Ethics: a blueprint for ethical behavior by internal auditors The Reality for Internal Audit: Ethical breaches are often caused by “Blind Spots” Real World Tests of Our “Blind Spots” Parting Thoughts: Recognizing and addressing “Blind Spots” Agenda 2

3 High-Profile Ethical Lapses: 3 3

4 The 21 st Century’s Iconic Ethical Failures “Enron has found its ‘integrated audit’ arrangement to be more cost-efficient and cost-effective than more traditional roles of separate internal and external auditing functions.” - Ken Lay, Enron CEO, 2000 “Enron has found its ‘integrated audit’ arrangement to be more cost-efficient and cost-effective than more traditional roles of separate internal and external auditing functions.” - Ken Lay, Enron CEO, 2000 4

5 But Increasingly, Ethics Charges Implicate Internal Audit 5

6 The IIA’s Code of Ethics: 6 6

7 \’eth-iks\ n 1: the discipline dealing with what is good and bad and with moral duty and obligation 2: a set of moral principles or values Ethics 7

8 The IIA’s Code of Ethics Purpose: To “promote an ethical culture in the profession of internal auditing.” Includes: – Principles – Rules of Conduct 8

9 The IIA’s Code of Ethics: Integrity Internal auditors shall: Perform their work with honesty, diligence, and responsibility. Observe the law and make disclosures expected by the law and the profession. Not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization. Respect and contribute to the legitimate and ethical objectives of the organization. “The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment.” 9 9

10 The IIA’s Code of Ethics: Objectivity Internal auditors shall: Not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. Not accept anything that may impair or be presumed to impair their professional judgment. Disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review. Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, and communicating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments. 10

11 The IIA’s Code of Ethics: Confidentiality Internal auditors shall: Be prudent in the use and protection of information acquired in the course of their duties. Not use information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization. “Internal auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so.” 11

12 The IIA’s Code of Ethics: Competency Internal auditors shall: Engage only in those services for which they have the necessary knowledge, skills, and experience. Perform internal audit services in accordance with the International Standards for the Professional Practice of Internal Auditing (Standards). Continually improve their proficiency and the effectiveness and quality of their services. “Internal auditors apply the knowledge, skills, and experience needed in the performance of internal audit services.” 12

13 The Reality for Internal Audit: 13

14 We see ourselves as the guardians of trust in our organizations: Far more likely to disclose ethical misconduct than to misbehave ethically ourselves! Our Perception: 14

15 “Our minds are subject to bounded ethicality, or cognitive limitations that can make us unaware of the moral implications of our decisions.” The Reality: Source: “Blind Spots” Max Bazerman and Ann Tenbrunsel, © 2011, Princeton University Press 15

16 “Professionals…tend to view conflicts of interest as a problem of intentional corruption. But…when people have a vested interest in seeing a problem in a certain manner, they are no longer capable of objectivity.” Source: “Blind Spots” Max Bazerman and Ann Tenbrunsel, © 2011, Princeton University Press 16

17 “We may predict we will behave in a manner consistent with our expectations for ourselves. But when the time comes to make a decision, we often behave the way we want to behave.” Source: “Blind Spots” Max Bazerman and Ann Tenbrunsel, © 2011, Princeton University Press 17

18 “(External) auditor bias arises at the unconscious stage where decisions are made, long before auditors report their judgments. Unbiased audits would be unlikely as long as auditors continued to be hired and fired by the companies they audit.” Source: “Blind Spots” Max Bazerman and Ann Tenbrunsel, © 2011, Princeton University Press 18

19 In Reality: Our “Blind Spots” Are Exposed Every Day 19

20 Blind Spot Scenario #1 Your internal audit team finds potential foreign bribery activity in an inter- national business unit: The General Counsel advises you not to worry – these are merely facilitation payments that are perfectly legal. Public disclosure could mean reputation loss, crippling fines, and general havoc. Your internal audit team finds potential foreign bribery activity in an inter- national business unit: The General Counsel advises you not to worry – these are merely facilitation payments that are perfectly legal. Public disclosure could mean reputation loss, crippling fines, and general havoc. 20

21 Blind Spot Scenario #2 You just completed a review of an area in which you worked several years ago. You found major control deficiencies that were likely present when you were responsible for the area. You realize that disclosure will likely discredit your performance. You just completed a review of an area in which you worked several years ago. You found major control deficiencies that were likely present when you were responsible for the area. You realize that disclosure will likely discredit your performance. 21

22 Blind Spot Scenario #3 During the course of a travel expense audit, you find a number of violations. You recognize that in at least one of the areas, you are not in compliance yourself. During the course of a travel expense audit, you find a number of violations. You recognize that in at least one of the areas, you are not in compliance yourself. 22

23 Risk assessment identifies an issue related to performance during a major holiday. Scheduling an audit would mean sacrificing everyone’s holiday plans. Risk assessment identifies an issue related to performance during a major holiday. Scheduling an audit would mean sacrificing everyone’s holiday plans. Blind Spot Scenario #4 23

24 Blind Spot Scenario #5 You discover a financial control failure that has resulted in a material misstatement of financial results. The external auditors did not catch it. Disclosure would likely devastate the value of your 401K and stock options You discover a financial control failure that has resulted in a material misstatement of financial results. The external auditors did not catch it. Disclosure would likely devastate the value of your 401K and stock options 24

25 Blind Spot Scenario #6 You audited an area where a family member or close friend had key management responsibilities. You found major problems that should have been prevented. Disclosure of the issue in the audit will likely impair or end the career of your relative or friend. You audited an area where a family member or close friend had key management responsibilities. You found major problems that should have been prevented. Disclosure of the issue in the audit will likely impair or end the career of your relative or friend. 25

26 Blind Spot Scenario #7 You are in the final year of a 3-year rotation in the internal audit department. You just audited the business unit in which you most want to work There were critical findings, and you realize that disclosure will very likely end any chance you have of landing an assignment in the audited activity. You are in the final year of a 3-year rotation in the internal audit department. You just audited the business unit in which you most want to work There were critical findings, and you realize that disclosure will very likely end any chance you have of landing an assignment in the audited activity. 26

27 Barbara and the IT function – How far can internal audit go in assisting management? Splitting contracts to avoid controls – How much courage does it take to deliver bad news to senior management? Two Real-World Blind Spot Scenarios 27

28 Parting Thoughts: 28

29 Recognize that we are all prone to behave in ways that serve our own interests Challenge your own thought/decision processes Watch and challenge those around you Slow down and deliberate (with yourself and others) Implement controls that force contemplation of ethical decisions Disclose potential ethical conflicts Remember that we are only as strong as our weakest link Recognizing and Addressing Blind Spots 29

30 Questions? The Institute of Internal Auditors Richard Chambers, CIA, CGAP, CCSA, CRMA President & Chief Executive Officer richard.chambers@theiia.org Twitter: @RFChambers 30


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